The Housing Supply Channel of Monetary Policy

Bruno Albuquerque, Martin Iseringhausen and Frederic Opitz

No 2024/023, IMF Working Papers from International Monetary Fund

Abstract: We study the role of regional housing markets in the transmission of US monetary policy. Using a FAVAR model over 1999q1–2019q4, we find sizeable heterogeneity in the responses of US states to a contractionary monetary policy shock. Part of this regional variation is due to differences in housing supply elasticities, household debt overhang, and housing wealth (volatility). Our analysis indicates that house prices and consumption respond more in supply-inelastic states and in states with large household debt imbalances, where negative housing wealth effects bite more strongly and borrowing constraints become more binding. Moreover, financial stability risks increase sharply in these areas as mortgage delinquencies and foreclosures surge, worsening banks’ balance sheets. Finally, monetary policy may have a stronger effect on housing tenure decisions in supply-inelastic states, where the homeownership rate and price-to-rent ratios decline by more. Our findings stress the importance of regional housing supply conditions in assessing the macrofinancial effects of rising interest rates.

Keywords: Credit conditions; FAVAR; house prices; monetary policy; regional data; supply elasticities; wealth effects bite; supply condition; housing supply channel; contractionary monetary policy shock; housing wealth; Housing; Housing prices; Consumption; Supply elasticity; Mortgages; Europe; Global (search for similar items in EconPapers)
Pages: 60
Date: 2024-02-02
New Economics Papers: this item is included in nep-ban, nep-cba, nep-fdg, nep-mon and nep-ure
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Working Paper: The housing supply channel of monetary policy (2024)
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